We own your wealth? Elizabeth Warren's flawed argument....

Harvard Law Professor and Senate hopeful Elizabeth Warren on "fair taxation."

So Warren's argument is this: Nobody got rich on their own; they benefited from public services that "the rest of us paid for." She cites: roads; police and firemen; and education as public services that help out businesses. She concludes, that the business people "get to keep a big chunk" of their profits, but part of the "underlying social contract" is that you have to give some money back.

This is a terrible and terribly confused argument. On the surface, it is plausible, and for that reason, dangerous. It needs to be put to rest.

1. The fact is, businesses and rich people pay most of the income taxes in the United States. the last CBO estimate was that the top 10 percent paid about 70 percent of federal taxes. About 50 percent paid nothing. So, who is this "rest of us" that she's talking about?

2. State and local governments pay for police, fire, and roads. These are services that the government should be delivering. They are non-excludable public goods. They lower transaction costs and allow businesses to function. In that limited sense, Warren has a point. Mind you, it's a point that nobody disagrees with.

That being said, these services are a very small "fraction" of what government does. In the U.S., the main federal government budget items are: national defense (most of which doesn't benefit anyone); Medicare; Medicaid; and social security. These don't have any obvious benefit to business. If the government stuck to what it does well (police/military/roads/fire, law enforcement etc...), Warren would have a case, but taxes would be FAR LOWER as would expenses. "If all the government did was build roads, educate kids, and provide for public order, it’d be a libertarian paradise almost up to the standards of Ron Paul. Then our government could easily be funded exclusively by taxes on the rich", Rich Lowry says.


In addition: there is tons of waste. The Fed subsidies big businesses; agriculture; some exporters; bails out huge banks; creditors; saves car companies; takes on the risk of housing loans; engages in "stimulus" .

3. What about education? As my favorite economist Russ Roberts points out: despite record levels of education spending, the U.S. public system is pretty poor. The money is poorly spent, and the output is of low quality. Businesses often have to retrain workers. Should they get a refund, then?

4. What about the basic principle of the argument? Rich Lowry has a smart argument: Focusing on infrastructure as the crucial support of entrepreneurial activity is like crediting the guy who built young Bill Gates’s garage with the start of Microsoft. Yes, Gates needed a roof over his head, and garages are useful. But it was Gates who had the ambition to do more in his garage than store his car and lawn-care products. Incalculably more important than his physical surroundings were his imagination and business sense. Could Gates have done it in Mogadishu or Peshawar? Certainly not. But the goods cited by Warren as the foundation of a workable business environment are extremely minimal.

5. Furthermore, if we link taxation to benefit, there is even a case for regressive taxation. Roberts smartly notes::

The other part that's missing from Ms. Warren's narrative is that all Americans, rich and poor, benefit from the public spending she mentions. It isn't just Steve Jobs who benefits because Apple iPads come to the Apple Store on public roads. All of Apple's customers benefit too. If her argument is that taxes should be related to benefit, should we raise taxes on the poor and the middle class? Sergey Brin and Larry Page became billionaires by creating Google, but the gains to the rest of us are much larger. Messrs. Brin and Page aren't able to capture anything close to the benefits they've created for the rest of society. So should the rest of us pay a bigger share of the taxes than Google's founders?

6. In addition, Warren cites the "social contract" as a reason for higher taxation, but the argument actually has a far more predatory tone: if it were not for the police, she asks, "what would stop marauding bandits" from ransacking the factory. The state was never a social contract. As Charles Tilly once said, it was always a protection racket. In the same way, we might imagine Tony Soprano telling a local pizzeria owner: "you need me for protection. It would be a shame if something happened to your business. Go ahead, keep a big chunk though.


7. Finally, Mike Munger at KPC has a great analogy: If I buy a guard dog to protect my house - ... does that mean the dog owns the house? Sure, I have to pay the guard dog services (police etc...), I have to tolerate some dog poop (waste); but no one would make the case that the dog has some sort of claim to my wealth produced from the house.